Is BP Really A Takeover Target For Exxon?

I find it interesting that in the past weeks we have seen a few reports stating that BP (LON:BP) could be taken over by Exxon (NYSE:XOM). Given that the idea seems to be taking hold at a couple of banks, I believe that in order to properly analyse that possibility, apart from brokers' speculation, one would have to answer a few questions, critical to assess if a $400bn company would bid for a $139bn one at a premium (which inevitably would require masses of synergies and benefits, as it would have to be done with a capital increase).

I would suggest an academic thought process that answered these questions:

A) Does Exxon want Amoco at a higher price after the history since 1998? When BP merged with Amoco in 1998, the energy world was shocked. Shocked partly because Amoco was seen as a "less attractive" set of assets in the industry. Exxon's current CEO, Rex Tillerson, was a top manager then and knew Amoco well. Since the $110bn merger of BP-Amoco in 1998, what we have seen out of the integration have been challenging returns, unfortunate incidents from Texas City, to Thunderhorse and Prudhoe Bay, culminating in Macondo. Considering that the liabilities and risk of gross negligence of Macondo are better understood but not fully clarified, would Exxon pay premium multiples for a replica of their core business and such a risk?.

B) Is BP much cheaper than other Big Oil stocks? It does not look massively cheaper than its peers, it is simply more of a conglomerate due to TNK. The entire sector has de-rated (see here), and BP only trades at a small discount to its peers (c5%), yet trades at a premium to mid-sized US integrateds. Exxon is much more expensive than BP on multiples, but that is a reflection of its industry leading ROCE position, lack of quoted divisions and centralized structure. Just on ROCE metrics, a very important one for the US giants, BP would be highly dilutive (Exxon's ROCE stands at the top end of the industry range, at 23%, BP at 17.6% ex-Macondo costs).

Meanwhile, BP is conducting a very logical and commendable "shrink to grow" strategy that will inevitably make the company focus in re-structuring. And selling legacy assets means also selling high return, fully depreciated assets, at good price admittedly, but puts pressure on delivering super-normal returns on growth projects like Rumaila (Iraq). And would any other supermajor want to conduct that same re-structuring? BP only really looks cheap against peers on PE and that may be a function of its corporate structure. On PE, BP trades at 6xPE 2012E versus 7.2x for Royal Dutch Shell (LON:RDSA) , but 6.4x ENI, for example, and 6.9x the sector. BP trades at 4x P/CF 2012E versus Shell at 4.5x and sector at 3.91x. BP offers a 4.35% yield 2012E vs. sector 5.21% (consensus estimates).

C) Would Exxon want to pay a premium for the Russian risk that TNK can provide (and TNK is c20% of BP's reserves)?. The situation with the partners of TNK (AAR) would probably not be any better with a change of ownership, and some would argue it could get worse if the buyer was an American, as the Russian government might not approve of the deal.

D) Would Exxon pay up and do a corporate giant merger for more exposure to Thunderhorse, a bigger exposure to Angola, and new exposure to Libya?

E) Does Exxon really want a giant refinery complex? c. 24% of BP's assets are in refining and marketing. With 7mmbpd of ovecapacity in global refining, would Exxon pay a premium for those assets? Exxon owns 37 refineries worldwide already.

F) The "resource" opportunity... is it so evident? Those who sell BP as a takeover candidate mention 18bn boe of proven reserves and 45bn of unproven that could be very attractive priced. But the same giant resources can be seen to be very cheap at Exxon itself (24.8bn boe of proven reserves, adding c3bn only last year). But people fail to mention how much of that enormous BP resource base is Russia's TNK (20%).

G) Does Exxon want more US downstream assets, with the risk that they can be targeted by any administration?Would anti-trust issues make the deal too costly, maybe not worth doing, because of the sheer scale of the divestments required (est $10bn)?

H) What would BP do to Exxon's growth profile? BP is expected to grow production by 2% pa to 2015, c. 1% pa less than Exxon. Dilution in growth could mean dilution in multiples for Exxon. BP produces 2.3mmbpd. Exxon produces 3% of the world's output (3.9mboepd). Does Exxon need to buy more production in areas where they are already present?

I) The "other businesses". Almost 16% of BP's invested capital is outside the traditional oil areas (exploation, production, refining and marketing). With businesses that range from travel to solar pv. BP is a global company with the largest exposure of any oil company to alternative energies, $10-15bn (valuation range) worth of renewable (solar, wind) investments as well as biofuels, and one of the leading shipping companies (BP shipping). Is Exxon interested in adding renewables and shipping to their portfolio?

The debate is on. BP is an interesting company on its own. It is slowly recovering from two major strategic blows. But I fear that the time of multibillion mergers between integrateds ended a few years ago. The reason why XOM bought XTO was clear. This idea? Probably as plausible as the much trumpeted "Shell for BP" of 2005, or "Petrochina for BP" of 2009.

Disclaimer: This is an academic analysis, not a recommendation to buy or sell a security.

BP p.l.c. (BP) is an integrated oil and gas company. The Company provides its customers with fuel for transportation, energy for heat and light, lubricants and the petrochemicals products used to make everyday items as diverse as paints, clothes and packaging. The Company operates in two business segments: Exploration and Production, and Refining and Marketing. Its Exploration and Production segment is responsible for its activities in oil and natural gas exploration, field development and production; midstream transportation, storage and processing, and the marketing and trading of natural gas, including liquefied natural gas, together with power and natural gas liquids. Its Refining and Marketing segment is responsible for the refining, manufacturing, marketing, transportation, and supply and trading of crude oil, petroleum, petrochemicals products and related services to wholesale and retail customers. In July 2014, Rubis SCA acquired BP Plc's LPG business in Portugal. more »

Royal Dutch Shell plc (Shell) is an independent oil and gas company, based in the United Kingdom. It operates in three segments: Upstream, Downstream and Corporate. Upstream combines the operating segments Upstream International and Upstream Americas, which are engaged in searching for and recovering crude oil and natural gas, the liquefaction and transportation of gas, the extraction of bitumen from oil sands and converting it into synthetic crude oil, and wind energy. Downstream segment is engaged in manufacturing, distribution and marketing activities for oil products and chemicals, alternative energy (excluding wind), and carbon dioxide (CO2) management. Corporate segment represents the key support functions, such as Shell’s holdings, treasury and self-insurance organization. In January 2014, Royal Dutch Shell plc completed the acquisition of Repsol S.A.'s liquefied natural gas (LNG) portfolio outside North America. In June 2014, Shell sold 19% in Woodside Petroleum Limited. more »

i would just say that whilst everything the author says is true, I thought along v similar lines a few years ago in connection with the "merger" betrween Exxon and Mobil. I used to work for Mobil, knew how tightly managed it was and found it difficult to envisage major savings/synergies. And I just found the scale of the "merger" implausible.

Despite my reservations that deal went ahead and appears to have been well executed. As were many of the Mobil senior management team.

The fact is that the era when the seven sisters bestrode the world has ended. The world now trembles to the heavier tread of the NOC's backed by state money and charged with achieving security of supply and control of national resource rather than shareholder return. The majors are finding their access to resources increasingly constrained.

Maybe an ExxonMobilBP can cope better with current circumstances than its smaller precursors.

I'd be surprised if discussions between XOM and BP had not been mooted even if only at a conceptual level.

Sure they could find the cash. Itd be a mighty undertaking to set up the loans/facilities given the size and therefore the number of banks to be brought together but it could be done.

Asset disposals would be required for competition measures imo - easy to put that against debt. Then there's the option of hedging production to pay down the debt. 3.5m boepd provides a lot of cashflow.

Will it ever happen though? Doubt it would go through the authorities and that XOM could achieve a lot more with a purchase of BG. Perhaps RDS and BP merger???

I think the important point is that BP is once again in the doldrums, as it was in the early 1990's but without the inspired leadership that emerged then to take it charging forwards.
And it is absolutely right that the NOCs are now in the driving seat and the Majors 'bulking up' to compete with them makes a lot of sense.

Spills & Spin; The Inside Story of BP, is published today. The book provides a behind-the-scenes look at the decisions and personalities that have shaped the company over the past 20 years. It charts BP's rise from industry also-ran in 1990, to industry-leader, under Lord John Browne, by the turn of the century, and the company's fall from grace since the Texas City blast in 2005. It reveals the truth behind BP's mega mergers and its (successful) attempt to turn climate change from a mortal threat to a lucrative business opportunity.

It investigates CEO Tony Hayward's restructuring of the group from 2007-2010 and reveals how decisions made on his watch contributed to the oil spill. The book also lifts the veil on the corporation's response to the spill, revealing the strategic errors, technical mistakes and infighting between company leaders which hampered the response effort.

Please find below a review from the Daily Telegraph today. The Sunday Times said they planned to review it this weekend and a video of a CNBC interview I just did, about the book, may be available on the CNBC Europe website soon.

Fund manager in Oil,Gas and utilities. I was voted Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters' Extel Survey 2011, the leading survey among companies and financial institutions. More than 21 years of experience in the oil, gas and utilities fields from corporate to investment banking, research and fund management. more »